In most states, sales taxes collected by a business owner are similar to trust funds because the law imposes a sales tax on the goods sold and the business owner is responsible for collecting the sales tax and forwarding it to the government agency that collects the tax. California is different. Our state is one of the few states in which sales taxes can be included in bankruptcy. In many states, such taxes are termed a nondischargeable debt. The reason that the laws of some states make them nondischargeable is that sales tax is a type of trust fund tax that was never really the store owner’s money to begin with. It is the trust fund nature of sales taxes collected by a business owner that justifies requiring repayment notwithstanding a bankruptcy filing. In states with these laws, when a business owner fails to forward the tax (that never belonged to the store owner) to the government agency, the store owner is essentially taking trust fund money that does not belong to the store owner. Dipping into trust funds for one’s one benefit is both illegal and justifies forcing repaying of the funds to the state even if you file for bankruptcy relief.
In California, however, retailer sellers technically do not collect a sales tax on the sales to customers. Instead, as a privilege of doing business and selling tangible personal property in California, retailers are required to pay a sales tax based on the amount of their gross receipts. Importantly, the sales tax in California is imposed on the gross receipts of the retailer, not on the sale transaction with the customer. True, when a customer makes a purchase from a store or business, the business owner collects sales tax from the customer. But the business is not collecting trust funds. Rather, the business owner is collecting addition funds so that it can be able to pay its gross receipts tax to the Board of Equalization. Therefore, unlike other states in which sales taxes become trust funds, in California they do not become trust funds since the tax liability is only a tax imposed on the gross receipts of the retailer. In fact, under San Diego bankruptcy law, liability for sales taxes can be eliminated under appropriate circumstances.
Sales taxes in California are both an excise tax and a tax on gross receipts. Excise taxes are dischargeable if they meet a simple test: it has been 3 years since they were due. Taxes on gross receipts use a more complicated test. In fact, they use the same test used for dischargeability of income taxes in bankruptcy, specifically: (a) 3 years must have passed since the sales tax was due, (b) 2 years has passed since the return was filed for the relevant year, and (c) 240 days has passed since assessment (if an assessment has been made). Because sales taxes are both an excise tax and a tax on gross receipts, for purposes of dischargeability the more restrictive test must be used, namely the 3 year/2 year/240 day rule.
In addition, and very important, with respect to the 2 year and 240 day period, if the business you operated was a corporation or LLC, you must file a return in your own individual capacity. An assessement or filing by the State Board of Equalization against you as a responsible person of a corporation or LLC does not meet the requirement and does not count as you filing the return in your individual capacity. Rather, you must file a return for the sales taxes stating that you are responsible for the full amount due, then wait 2 years before filing bankruptcy on the sales taxes.
If you have liability for sales taxes based on sales made to your customers, talk to a San Diego bankruptcy attorney and learn your options. With proper planning and waiting the requisite period before your case is filed, you can eliminate your liability for sales taxes in bankruptcy San Diego.